The year 2008 will definitely be remembered as the most imbalanced year in the last ten years. In the first three quarters of the year, almost all of the air conditioner manufacturers were plagued by increased production costs caused by the roaring prices of crude oil and other raw materials. In the fourth quarter of this year, the entire world, including the air conditioning industry, was swept by the worst economic crisis since the Great Depression. Consequently, the consensus views the global air conditioning market in 2008 as being on a par, or even having a slight drop, compared with that of 2007.
The air conditioning industry often acts as a barometer of the economy, particularly for the real estate industry. With the worldwide spread of the global financial crisis caused by U.S. subprime loans, the real estate markets in all the leading countries began to decline. In Japan, compared with the five-year average figure of the period from 2002 to 2006, experienced a decrease in 2008 for newly constructed residential buildings at a rate of 5.5% in August, 7.3% in September, and 16% in October. In the United States, the number of newly constructed residential buildings was the smallest since 1959. In China, sales of commercial and residential buildings in Beijing, for example, decreased by 55.8% in the third quarter in 2008.
Large fluctuations in the exchange rates of main currencies had a considerable negative effect on air conditioner exports as well. The depreciation of the euro caused many Chinese companies to lose their respective advantage in production costs. For Japanese companies, conditions were even worse. The appreciation of Japanese yen has put huge pressure on air conditioner manufacturers.
The shrinkage of the air conditioner markets of the United States and Europe has caused Asian manufacturers to experience hard times never previously experienced. As the expression goes, “when it rains, it pours,” China suffered the severest earthquake in Sichuan Province in May 2008 since the foundation of the People’s Republic of China. Some air conditioner manufacturers had to reduce production scale because of the decreased demand in the Chinese market.
History often seems to repeat itself. At the end of 2007, Ingersoll-Rand announced it acquired Trane. The US$ 10.1 billion acquisition created a global climate control giant. One year later, at the end of 2008, another giant’s merger occurred. Panasonic announced plans to acquire Sanyo Electric in a deal valued at ¥800 billion (about US$ 8.9 billion), which would create Japan’s largest electronics manufacturer.
On September 1, 2008, the national energy efficiency standard for inverter air conditioners was implemented in China. According to the Chinese government, a new version of the national energy efficiency standard for room air conditioners (RACs) will be officially put into effect in 2009. The increased requirements on both inverter and non-inverter air conditioners urged manufacturers to improve their technical level. On the other hand, labor costs have kept increasing in China in recent years. Both of these two reasons have prompted world-leading air conditioner manufacturers to set up factories outside China.
The harsh economy conditions have caused more companies to seek alliances. During the spring of 2008, Daikin commissioned Gree to produce small inverter air conditioners for the Japanese market. In December 2008, the two companies agreed to cooperate again to set up a joint venture to produce key components for air conditioners. In July 2008, Carrier and Midea announced their joint efforts to establish a joint venture for manufacturing Carrier branded air conditioners and small commercial air conditioners. Also in July, Trane’s new factory in Taicang was formally put into operation. In November 2008, Toshiba Carrier signed an agreement to provide Midea with highly efficient DC inverter technology.
The United States
The climate in the summer was suitable for sales of air conditioners and, as a matter of fact, sales remained good in the first three quarters of the year 2008. However, the financial crisis ruined an otherwise good year for the air conditioning industry. The market became to shrink sharply in the fourth quarter, resulting in large inventories for distributors. Many of distributors reduced their orders for 2009, which was definitely bad news for Asian air conditioner manufacturers.
According to policies released by the U.S. government, R410A must be used from 2010. However, with the bad business environment, distributors appear very cautious about sales of R410A products since both price and installation cost of products using these is higher than products using R22.
The total shipment of window RACs, unitary air conditioners, and heat pumps in the United States was 13.4 million units in 2008, a 4.2% decrease compared with the 14.0 million units in 2007. In October, the shipment of central air conditioners and air-source heat pumps decreased by 17%.
Industry insiders still see a gloomy picture for the U.S. market in 2009. Most of them predict that the window type market will decrease by 30%, and the unitary market will decrease by more than 20%.
Europe is probably the most severely afflicted area in all the regions with Italy and Spain being the two countries receiving the most serious blow. From the second half of 2008, some distributors canceled their orders with Chinese air conditioner manufacturers since they cannot afford the loss caused by the depreciation of the euro.
The climate in 2008 in Europe was not good for air conditioner sales. The continuous drop in exchange rates has prevented distributors from purchasing from Chinese manufacturers. Since nobody knows when the market will bottom out, almost all of the distributors consider it prudent to sell off inventories before placing new orders.
It seems the slumping market in Europe has frozen production lines in Asia. Industry insiders predict that the European market will be reduced by more than 30% in 2009. Nevertheless, in some countries, such as Turkey, which has been keeping a GDP growth higher than 7% since 2007, the air conditioner market may still show an increase.
As the largest global manufacturing base, China produces about 80% of the air conditioners sold in the world. In 2008, more than 30 million various air conditioners had been exported, accounting for 57% of all the air conditioners produced. Because the United States and Europe are two of the most important export regions for Chinese products, the retrenchment of the market in these two regions in the fourth quarter in 2008 had Chinese air conditioner manufacturers experiencing their coldest winter in recent memory.
The slump of the real estate market in China resulted in the reduction of the demand for residential-use air conditioners. To make the situation even worse, the stock market in China experienced a bear market in 2008 for almost the whole year, which inevitably had a negative effect on the consumption of the Chinese people. About 23 million air conditioners had been sold in the Chinese market in 2008, a 4.2% decrease compared with the 24 million units sold in 2007.
Both the Chinese government and air conditioner manufacturers have adopted methods to prevent the decrease. However, according to the estimation of some industry insiders, the air conditioning market in 2009 may also suffer a decrease of 4.2%.
Japan boasts one of the most mature air conditioner markets in the world. According to statistical data provided by the Japan Refrigeration and Air Conditioning Industry Association (JRAIA), RAC sales by the end of November 2008 were almost the same as those of 2007. However, the sales of packaged air conditioners (PACs) had dropped by 13.1% compared with the same month in 2007. PAC exports also began to decrease from the second quarter. In the second and third quarters of 2008, PAC exports decreased about 30% and 18% respectively, compared with the same periods in 2007.
According to estimates of the Nikkei News, the profit margins of listed companies in 2009 will decrease by 32% compared with 2008. With further aggravation of the economy, it is very difficult to predict the air conditioner market in 2009. In order to reduce operation risk, many multinational corporations cut their 2009 budget. According to estimates, the RAC market and the PAC market may decrease in 2009 by 5% and 15%, respectively, compared with 2008.
Russia, Brazil, and India
As the largest potential air conditioning market in Europe, Russia finally brought some good news from the European market. A large amount of foreign currency reserves in this country enables it to maintain a strong ability to weather the global financial crisis. As a result, it is generally considered that the 2009 air conditioner market in Russia should almost be the same as that of 2008.
With the slowing of foreign investment in Brazil, the economy development in this country should also slow down. The story in India is somewhat different. Daikin is proceeding forward with construction of a new factory there, and Hitachi is also doing well in developing the market. Imports from China have also increased as well.
The price drop of crude oil decreased the rate of development, and the activity in real estate market slowed rapidly in Dubai. The retreat of foreign investment within the economies of the petroleum industry caused the beginning of a decline in the oil-producing countries of the Middle East. However, in other countries and regions of the Middle East and Africa (especially North Africa), the influence of the global financial crisis to the air conditioning market has lagged. The market in these regions should experience no noticeable changes in 2009 compared with 2008.
The sizeable drop in exchange rates for the region of Oceania had a substantial negative effect on the air conditioning market. This also resulted in reduced imports and increased inventories.
Trends in 2009
In order to survive the most serious economic crisis in recent years, air conditioning companies throughout the world have adopted a series of steps.
Energy conservation and environment protection have been two global themes in recent years. With the presidential inauguration of Barack Obama on January 20, the U.S. government is expected to implement a new policy to reduce America’s heavy dependence on crude oil and will provide a most welcomed gift from the new President to those companies involved in solar and wind power generation. In Japan and China, environmentally-friendly heat pump systems keep gaining momentum. In Japan, the CO2 heat pump water heater market has been expanding dramatically in recent years. Backed up by the Japanese government and electric power companies, CO2 heat pump water heaters are penetrating into various parts of this country. In November 2008, 490,000 heat pump water heaters were sold, a 20% increase compared with the same month of 2007. In China, the market of heat pump water heaters kept developing at an average growth of about 102% from 2004 to 2007. In 2008, the market also kept increasing at a high speed.
To strengthen market development in the emerging markets is another important step that the air conditioner manufacturers have adopted. Many companies from Japan, China, and Korea have sped up their marketing activities in Russia, Brazil, India, Vietnam, and other emerging markets.
Some leading companies began to provide customers with total solution packages instead of only products. In this way, it seems that they have found some new growth points for profit.
Some analysts predict that the global economy may recover by the second half of the year 2009. If so, although we have had an awful start beginning in 2009, we can still expect a bright conclusion to the first ten years of the 21st century.